- CFA Exams
- CFA Exam: Level II 2021
- Study Session 10. Equity Valuation (2)
- Reading 27. Discounted Dividend Valuation
- Subject 2. The dividend discount model

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**CFA Practice Question**

An analyst has gathered the following data to analyze a stock.

- Current stock price: $20.
- Expected price at the end of the next period: $22.
- Current period earnings: $2.
- Expected next period's earnings: $2.2.
- Stable earnings growth rate to infinity: 6%.
- Stable payout ratio: 50%.
- Beta: 1.2.
- Required rate of return: 12%.

Suppose now is the end of the current period. What is the expected rate of return for the next period?

Correct Answer: Expected rate of return = (End of period value + dividend) / (start of period value) - 1 = (22 + 2.2 x 50%) / 20 - 1 = 15.5%.

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